We all know what a budget is: a record of themoney we expect to receive and how we

expect tospend it. It’s a pretty simple concept but a little moredifficult to put into action,
especially when rules andregulations from state and federal agencies arethrown into the mix.
This manual will give you a“big picture” look at budgets and tell you what youneed to do to stay
out of the principal’s office

Virtually every aspect of management accounting is implicated in budgeting. Budget in is

related to cost accounting, responsibility accounting, performance measurement, and
compensation. Budgeting is used for many purposes, including planning and coordinating an
organization’s activities, allocating resources, motivating employees, and expressing conformity
with social norms. Not surprisingly, budgeting is one of the most extensively researched topics
in management accounting (Luft and Shields2003). It has been investigated from multiple social-
science theoretical perspectives, generating diverse streams of research that have developed in
partial isolation from each other. Although any social science can, in principle, provide a basis
for investigating budgeting, most of the existing accounting research on budgeting is informed
by economics, psychology, and sociology; we therefore focus on these three theoretical
perspectives.

Although public finance comprises a significant, if not dominant, part of all

developed economies and thus directly affects the lives of all its citizens, the existing analytical
framework is still significantly underdeveloped compared to that of corporate
finance. Whereas Fisher significantly simplifies the analysis of corporate finance problems
with the proof of his Separation Theorem showing the importance efficient capital
markets, which explicitly guides managers to concentrate on the maximization of wealth
without considering the wants of stockholders, no similar theoretical guidelines exist for
public servants genuinely striving to satisfy the wants of their constituents. While Arrow has
provided a general framework for the analysis of choice in the public framework, it
remains too abstract for practitioners faced with the day-to-day task of Public
Expenditures Management (PEM). And within the field of public finance, material concerning
local government budgeting is lacking. Thus, the current state-of-the-art provides little
theoretical guidance for local government employees charged with satisfying the wants of their
constituents.
As in the natural sciences, theory in the social sciences is very much dependent
on reliable data – the absence of which makes it impossible to separate good from bad
theory. The purpose of this work is to fill an existing void in descriptive data
concerning local government budgeting in Central and Eastern European Countries (CEE
countries). In the terms of reference given to the project teams chosen for each of the
countries included in the study, the project was designed to elicit the three types of information:
(1) the budgeting environment, (2) the budget process, and (3) a summary of best practices.
Any prescriptive theory of local government budgeting in CEE countries must explicitly
take into account the legal structure and the government institutions that make up the
budgeting environment within which a manager must operate. But this is not sufficient to
model the actions of managers. In the decision-making process, managers are also
strongly affected by their internal value systems with regard to questions of “best” or
“desirable”. Finally, to complete the descriptive model of a local government budgeting
system, a description of the budgeting process from the start through the execution to
the final audit is necessary. For the country specific details concerning these three types
of information, the reader is guided to the following country studies. What follows is a
summary of the important results of the country studies along with recommendations for future
research.

LIMITATIONS OF BUDGETING
INACCURACY
Budgeting is based on a lot of assumptions in estimating the expenses and revenues.
These are generally based on trends and the market scenario prevailing at the time of making the
budget. Budgets can also be based on the predictions made for the coming year considering the
data available at the time of budgeting.
Any shift in the macroeconomic conditions, like an economic downturn or changes in
currency exchange rates, changes in interest rates etc., can lead the actual costs that vary
significantly from the budgeted expenses.

TIME-CONSUMING & COSTLY

Budgeting exercise can be at times a very time-consuming exercise. It involves extra
manpower to get the estimates as accurate as possible. Especially for a big company with various
departments, budgeting exercise takes a huge effort. The time consumed may be low in cases
where the company uses budgeting software and the employees are well-trained. If the company
uses zero-based budgeting technique, the time, cost and effort involved can be considerably
large.

RIGIDITY
Budgeted numbers are considered sacrosanct by all the departments and there is usually
very less flexibility after budgeting exercise finishes. The entire focus of senior management is
on the budget and all the strategies revolve around the budgeted numbers. Any change in the
market situations does not generally evoke the attention of the management to make any drastic
change in the strategy due to budget constraint. The company should rather shift as per the
market and book more profit rather than stick to the budget.

EXCESSIVE SPENDING
Some managers believe that all the funds that are allocated to their department need to be
spent. It is believed that if they do not use as much as they are authorized to in the current
budget, the funds budgeted for them in the next budget would be reduced. This leads to
unnecessary wastage of funds and proves harmful to the company as a whole affecting its profits.

SCOPE FOR MANIPULATION

At times, an experienced manager may deliberately inflate his expenses and try to reduce
the revenue targets to be set in the budget. This way he can easily get an opportunity to get the
favorable variances against the budgeted numbers, that is, by incurring lower costs than budgeted
cost and achieving higher revenue than the budgeted revenue. This misleads the stakeholders and
demotivates the employees.

ALLOCATION OF EXPENSES
The allocation of expenditure between the departments is generally the call taken by
senior management. Managers of some departments may raise issues in the method used for
allocation of these expenses and this may create controversies. It is not possible to take into
considering suggestions from all the departments regarding budgeting methods and allocation of
expenses.

FINANCIAL OUTCOME ORIENTED

Budgeting exercise is argued to be numbers driven. It focuses on the quantitative aspect
of the business or improving the profitability of the company and does not consider the
subjective or qualitative aspect. The fact that the stakeholders including the customers of the
company care about the quality of services along with the cost of it is totally side-tracked. These
are taken for granted as a part of the budget but not really seen in the budget. So budgeting
exercise does not always look into the needs of the customers.

CONFLICTS IN THE ORGANIZATION

At times when a particular department is unable to meet the budgeted targets, the end up
blaming the other department that provides services to it for not providing the necessary support.
They even conflict on the transfer price that is decided internally between the departments. This
creates unnecessary tensions and the company as a whole may not be able to run efficiently.

Conclusion: Although budgeting comes with a lot of limitations, it may be absolutely

wrong to conclude that budgeting exercise is futile for an organization. It does keep a department
tied up and restricts their freedom, but to some extent, it does bring about some discipline within
the departments in terms of the expenses that they incur during an accounting period.
 Considering all the disadvantages of budgeting, it is the decision of the top management
how to do the budgeting exercise and optimize the cost to a company while setting up the budget.